Monday, 3 September 2007

The market and the masses

Winston Churchill once said: “Liberalism is not Socialism, and never will be. There is a great gulf fixed. It is not a gulf of method, it is a gulf of principle. ... Socialism seeks to pull down wealth, while Liberalism seeks to raise up poverty.” I was reminded of this quote while reading a comment piece in the Guardian by George Monbiot entitled ‘How the neo-liberals stitched up the wealth of nations for themselves.’ The premise of which is that a group of wicked rich people called ‘neo-liberals’ have tricked everyone into accepting economic policies that have hugely enriched a tiny super wealthy minority while leaving the rest of us behind.

The problem with this argument is that far from just benefiting the super rich, the gains from ‘neo-liberal’ reforms are widely dispersed and extend to even the poorest members of society. They do not benefit from the hyperinflation, high taxes and pricey imports that usually result from the kind of socialist and Keynesian policies that Monbiot admires. While ‘the neo-liberal’ trinity of sound finance, sound money and free trade are of real benefit to the most vulnerable members of a society.

In 1975, New York city was on the verge of bankruptcy. Years of profligate spending by successive mayors had pushed the city further and further into debt and it was now barely able to pay its bills. To avoid a financial catastrophe the city was forced to seek a bail out from the Federal government, the conditions of which was that the big apple had to balance its books. The only way to achieve this was through tax increases and painful cuts in public spending. The services that bore the brunt of these cuts were the police and fire department with predictable results for the safety of ordinary New Yorkers. Where did blame for this disaster lie? Monbiot implies that it lies with the ‘neo-liberals’ in the treasury department who added conditions to the federal assistance to the city. This is a rather strange idea. The city could not indefinitely spend more than it took in, in taxes. At some point the city was going to have to pay its debts, all the conditions did was bring that day forward. Ultimate responsibility for the crisis must lie with politicians in New York, who behaved more like a shopaholic with a credit card than responsible public officials. They pushed the city to the edge and the consequences of their actions should serve as a warning to anyone who believes that sound finance is something that only matters to bankers and accountants.

Inflation is one of the worst curses that can be inflicted on a nation. It pushes every citizen into a constant struggle to get by as the money in their pockets becomes worth less and less. The monetarist policies designed to tackle this great social ill are one of the most controversial but ultimately most beneficial parts of the ‘neo-liberal’ program. The vast majority of citizens suffer when levels of inflation are high because it becomes very difficult to save money and the constant changes in prices make it hard for consumers to compare the merits of different products. The pain is worse for the less well of because they find it harder middle class compatriots to protect the value of their savings from inflation, who can usually move their savings into a more stable foreign currency.

Free trade is often assumed to harm the poor. You would certainly get the impression it did if you listened to the populists who preach the benefits of protectionism but this is not necessarily the case. Free trade enables nations to specialise in the type of production that they have a comparative advantage in and helps to hold down prices by exposing domestic firms to competition from foreign firms. This should boost economic growth and leave the majority of people better off. The more credible critiques of free trade tend to argue that these gains do not spread to the poor because low skilled workers see their wages driven down because many of the industries that created a demand for their labour have been moved abroad. There are at least three problems with this critique. It sees things exclusively from the point of view of developed nations. The situation is rather different in developing world which have been gaining rather than losing low skilled jobs and in an number of cases has seen the gap between rich and poor reduced by international trade. It also sees things only from the point of view of poor workers when many of the poorest are those on living on benefits, who gain from lower prices (which mean that there money will go further) and higher growth (which usually leads to more tax revenues that can be used to pay for more benefits. It also ignores the possibility of redistribution of some of the wealth that is created by liberalising trade.

There is no law that states that because somebody is gaining, someone else must be losing. The huge fortunes gained by the wealthiest members of society are not a sign that the poor are losing out but that society as a whole is becoming wealthier. The claim that those who support the market care only for the rich is a nonsense. We simply think that the best way to help the less fortunate is to give them back the economic freedom that has been taken from them.